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In an interview to GTNews, Larysa Melnychuk, Managing Director at FP&A Trends group, shares her knowledge on the current state of Financial Planning and Analysis in different countries.

Although it is becoming commonplace to refer to financial planning and analysis as FP&A, this is actually an American term and one that is still not widely used outside of the US.

It is true that around the world, FP&A goes by many names.

UK & Europe

Larysa Melnychuk, the founder of the London FP&A Club, notes that five or six years ago in the UK few people would have recognised the term. “I have worked in FP&A in the UK for the past 16 years, but it wasn’t until about five years ago that I began to hear the term,” she says. “Even now here in the UK, you will find finance directors at medium-sized companies who have never heard of FP&A.”

Instead, Melnychuk finds FP&A is referred to by several different names, including:

Management accounting

Business finance

Commercial finance

Decisions support

Budgeting and planning

Business planning and analysis (BPA).

“FP&A is still perceived as a very American term in the UK,” Melnychuk adds.

As for the chain of command, up until about five years ago, many FP&A departments in the UK reported to the financial controller. “For some companies this worked and others it didn’t, but they all seem to say the same thing: financial controllers look at historical information. They’re not forward-looking,” Melnychuk says.

Today, that trend is changing. Much like the US, the FP&A function now more often reports to the chief financial officer (CFO) in the UK. This allows for FP&A to be more strategic and influential across the organisation. However, there are still some companies where FP&A reports to the financial controller. A best practice for companies, Melnychuk suggests, would be to have FP&A report to the CFO, because FP&A and the financial controller often require different skills and serve different purposes.

Europe

In Europe, how companies refer to their FP&A departments often depends on how international they are. Typically, the term FP&A is only used by companies that work regularly with the US.

Generally, in Nordic countries, as well as in Germany, France and the Netherlands, FP&A is typically referred to as business control. Business control is not to be confused with finance control, Melnychuk stresses. “Finance control is everything related to financial reporting and statutory accounting,” she says. “Business control is part of management accounting, which includes FP&A.”

Unsurprisingly, the titles for FP&A professionals in Europe also differ from their American counterparts. FP&A managers are often referred as business controllers in some European countries.

However, Melnychuk adds that in Nordic countries and in Germany she’s met business controllers that do not consider themselves finance people. “One factory and plant controller described to me his role as operations rather than finance related,” she says.

For FP&A individuals to become more strategic and more influential, the best course of action for them is to report directly to the CFO, and practitioners are recognising this. “We see indications that this is exactly what is going to happen over time,” Melnychuk says.

While the terminology for FP&A might differ from country to country in Europe, other things typically remain consistent. Medium-sized companies with revenues less than US$1bn may have combined functions in finance, but most large companies have a separate FP&A/business control/management accounting (etc.) department.

Middle East

FP&A in the Middle East differs from Europe and the US. Even some of the largest multi-billion dollar companies are still family based and – unlike Europe – their finance departments are not divided into multiple factions. As such, many staff members have combined functions, so they may work in both FP&A and finance reporting.

“Traditional companies in the Middle East do not actually know what FP&A is; they’ve never heard of it,” Melnychuk says. “For example, the finance manager will simply be responsible for budgeting and planning, as well as statutory reporting.”

Given that FP&A essentially does not exist as its own department many local companies in the Middle East, it is difficult to determine any common reporting structure for FP&A. Finance staff, of course, report to the CFO, but until companies in the Middle East begin to establish FP&A as its own entity, there is no clear picture of a reporting structure.

“The same companies that vow to respond quickly to market shifts cling to budgeting – a process that slows the response to market developments until it is too late.”

- Jeremy Hope and Robin Fraser, co-founders of BBRT

With analytical driver-based models, FP&A’s processes become more flexible and dynamic. A new generation of systems allows for agility, easy management of FP&A routines and collaborative planning. FP&A systems are now more often managed in the finance department, which helps to eliminate the problems of ‘black boxes’ and heavy reliance on expensive programmers and IT departments.

Today, we are seeing the emergence of a new generation of FP&A professionals, who are different from traditional accountants. These practitioners can see the big picture, understand key business drivers, build models and generate valuable business insights. Most importantly, they can communicate the insight for effective decision-making and also inspire people across the organisation.

The basis for this evolution is a changing business culture. The traditional, outdated budgeting mentality is being challenged more and more. Target negotiations, political games and biased planning processes cost companies a lot of money. These conventional budgeting practices are non-value adding and need to be abandoned if organisations want to stay competitive in this dynamic business environment.

While the process of moving away from a traditional budgeting mentality is painful and slow, it is happening around the globe. The question is, are we ready to abandon the traditional budget completely?

Going Beyond Budgeting

The proponents of the ‘beyond budgeting’ movement are convinced that the budget attempts to fill too many roles, namely:

Setting targets.

Planning.

Resource allocation.

Coordination.

Performance management.

One of the biggest conflicts of interest lies in trying to combine planning with target negotiations. It is a well-known paradigm: the budgeting process is a process of heavy target negotiations. Targets are linked to remunerations. This makes traditional budgeting a very emotional process: it is a battle for next year’s pay package of the participants. Can it still be objective and unbiased? Probably not.

This is a game, where ‘subjective’ or ‘objective’ are often forgotten. When this subject is discussed at FP&A Club events in different countries, it invariably produces smiles on FP&A professionals’ faces. They can strongly relate this behaviour to inefficiencies in their processes. Unfortunately, this traditional process is still so heavily embedded in business practices around the globe that often it is very difficult to challenge the status quo.

Luckily, change is already underway. More and more, companies are realising that budgeting is out-of-date before its finalisation and, therefore, is not that relevant for business.

Some companies have even started to think about abandoning the budgeting process altogether. Norway’s StatOil and Sweden’s Handelsbanken are among those to have done so, demonstrating that it is possible to survive and prosper without a budget.

However, this cannot happen overnight. Going beyond budgeting requires serious changes in business culture. It is well-known that such changes are the slowest and most painful.

The main problems of traditional budgeting may be summarised as follows:

Planning and forecasting are mixed with the target setting process.

Compensation targets are fixed and heavily negotiated during the planning and budgeting process.

Budgeting for the year is fixed. It is perceived as the head of each department’s annual allowance. If he/she does not spend this year, that budget can be cut next year.

The capital budget is set during the budgeting process. It is often fixed for the next financial year (in both projects and money terms). If you see an interesting business opportunity during the year, it may be not considered at all if you do not have the budget for this new project.

Looking at the problems of traditional budgeting, many realise that it does not fit for purpose. Are we ready to abandon it though?

Many FP&A professionals find the idea of abandoning the budget difficult to comprehend. Typical responses include:

How will we report to the market analysts?

How will we compensate our sales force?

How will we control our expenses?

The reality is that the beyond budgeting philosophy does not leave an empty space. Once the budget has been abandoned it gives new management tools that allow companies to overcome inefficiencies and a culture of dysfunctional behaviour.

Beyond Budgeting, Step-by-Step

Basically, the first step should involve separating the three processes that are historically combined in the traditional budgeting routine; namely target, forecast and resource allocation.

The next step should consist of improving each of these processes:

The target should become more ambitious, but relative. For example, it should be connected to external industry benchmarks. Fixed targets do not support holistic performance management practices.

The forecast should be driver based and analytical, assumptions should be logical. Only a logical, analytical process can help create an unbiased planning and forecasting process.

Resource allocation should be flexible, not fixed. If a new opportunity arises during the year, it should not be killed because of the lack of capital budgeting.

The instruments of beyond budgeting are different. In general, it is based on rolling forecasts, balanced scorecards, analytical driver-based models, modern FP&A systems and efficient FP&A departments.

Above all, the most important factor for beyond budgeting is business culture. While some organisations are not yet ready for this change, they may well become so over time and the process will be evolutional.

Many companies are currently in a stage of transition: deeply dissatisfied with their FP&A processes, overworked and bombarded by deadlines, and looking for new FP&A talents that can be difficult to find. They are beginning to take the first positive steps towards a better FP&A business culture: implementing rolling forecasts, driver-based models and modern FP&A systems.

However, the culture is often driven from the top of the organisation. Chief financial officers (CFOs) and chief executives (CEOs) have lived with budgets for too many years.

The simple test in order to understand how embedded the "traditional budgeting culture" in your processes is to ask your FP&A team the following questions:

Are you ready to challenge your CFO/CEO, when he/she sets unrealistic targets? Are you ready to point out when a plan is biased and not in-line with the trends and driver-based models you have?

Do you have enough courage and power to eliminate ‘hockey-stick forecasts’ in your company, which often demonstrate how unrealistic and biased the process is?

If you can answer ‘yes’ to the above questions, then probably you are ready for the beyond budgeting journey.

If not, good luck in your search. Please remember though that if you want your FP&A department to become more strategic and influential, you have to challenge the existing status quo.

This article was first published on http://www.gtnews.com and http://www.afponline.org/

The past 5 years have seen significant transformations in the FP&A world.

I have been fortunate enough to have travelled extensively and seen these changes. I observed many restructures, system implementations, analytical insights and innovations, redundancies, frustrations, deadlines… In other words- I saw a lot of changes in the FP&A World first-hand: both successful and painful. I met a lot of FP&A professionals – hard working, exciting, inspiring and often burned out.

In this article, I want to share my list of the Top 5 FP&A Trends.

1. Quality of FP&A data
Good quality FP&A analytics starts from clean and reliable data. In other words, data quality is an essential characteristic that determines the reliability of data for making decisions. When different systems and tools do not speak to each other, finding "the one source of truth" can be a very time-consuming and expensive exercise. Lack of good quality FP&A data is a renowned reason for many FP&A inefficiencies. When the valuable FP&A effort is spent on data cleansing and reconciliations, there is not enough time left for analytics. In the new year, we will continue to see many projects focusing on improving data quality.

2. Flexible and Dynamic FP&A Models
Traditional budgeting, planning, and forecasting have always been too detailed. Many companies still plan and forecast to the level of their General Ledger. Such a detailed planning process leaves no time for decision-making and improvements. In the near future, we will see more companies re-adjusting their planning models to driver-based, less detailed, more flexible and dynamic ones.

3. Shorter FP&A Cycles will improve decision-making process
If your company is still involved in a lengthy and inefficient planning and forecasting battle, it is time to reconsider your process. If your forecasting cycle is more than 3 days and your annual planning process is longer than 3 months, you are most probably not realizing the true potential of your FP&A capabilities. Decision-making has a lead-time and FP&A process should be capable of supporting it. In the near future, many companies will restructure their FP&A processes in order to decrease the planning and forecasting cycles.

4. FP&A and Strategy Execution
Historically, FP&A often stayed away from the strategic planning process. Today the FP&A world is becoming more involved in long-range planning processes. We will continue to observe the gradual harmonization of these two processes. Modern systems can help FP&A to connect Strategic and Business planning through drivers and collaborative routine.

5. Modern FP&A Education will be in High demand.
There is a high demand for fresh FP&A talent in the market place. The demand drives the supply. In the near future, we will see a high interest in modern FP&A education. The world needs a new generation of FP&A professionals: bright, analytical, communicative, strategic and influential.

Enjoy the challenges that lie ahead of us. At the times of black swans and perfect storms, the FP&A world needs these changes and disruptions.

“Great innovation only happens when people aren’t afraid to do things differently”.
--George Cantor, the founder of Set Theory

The International FP&A Board will open its 18th global chapter in Chicago on 12April 2018. The first professional debate will be devoted to the global trends in modern Financial Planning and Analytics (FP&A).

The Board was established in London, UK in 2013 and now successfully operates in 11 countries of Europe, the Middle East, Asia, Australia and the USA. This is a leading professional think-tank that gathers expertise of many senior finance practitioners. Its mission is to identify and support new global trends, skill sets and thought leadership in modern corporate financial planning and analysis (FP&A).

The FP&A Board meetings are exclusive to senior finance practitioners in active employment (CFO, FD and Head of Finance level) at large local and international organisations. They are complimentary, vendor-agnostic and by invitation only.

At this stage, we are inviting only 25 members to join the Chicago FP&A Board.

Larysa Melnychuk, MD of FP&A Trends Group and founder of the International FP&A Board.

Participation in FP&A Board meetings is complimentary and exclusive to finance practitioners at CFO, FD, and Head of Finance level in active employment at large local and international companies. We cannot confirm the registrations of vendors, salespeople, consultants, middle management or unemployed.

Register to join the meeting while we still have the available places: